Part 1 - AL-Tax

International Taxation Handbook252321Labor1917%151311975Figure 8.2197019711972197319741975197619771978197919801981198219831984198519861987ConsumptionCapital19881989199019911992199319941995199619971998199920002001200220032004Consumption (ESA 79) Labor (ESA 79)Consumption (ESA 95)Labor (ESA 95) Capital (ESA 79)Capital (ESA 95)Taxes (including social security contributions) as percentage of GDP by economicfunction in the EU-15. Note the statistical break due to a change in classification at Eurostat.Source: European Commission (2006a)Tax competition – broadly defined as noncooperative tax setting by independentgovernments competing for a mobile tax base – has attracted growing attention aseconomic integration progresses and factors of production and some taxpayersbecome increasingly mobile. The debate is not a new one and the tax competitionliterature as far back as the 1950s (Tiebout, 1956) already mentioned the possibilityfor voters to ‘vote with their feet’ so as to choose their preferred combinationof tax contribution and provision of local public services across competinglocal jurisdictions. In the mid-1980s, both Zodrow and Mieszkowski (1986) andWilson (1986) derived in a formal way the dynamics and the consequences of taxcompetition in what have come to be known as the basic models of tax competition.In their models, tax competition for mobile tax bases leads to a ‘race to thebottom’ in tax rates and leaves the competing jurisdictions with too little revenueto be able to provide public services at a socially optimal level. This basic resulthas also led to the fundamental question whether capital taxation – and for that180